To encourage entrepreneurship in the UK, eligible individuals pay a lower 10% rate of Capital Gains Tax on the disposal of business assets, subject to a lifetime limit. Entrepreneurs’ Relief is now called Business Asset Disposal Relief (after April 2020).
What is Business Asset Disposal Relief (BADR)?
Usually, when you dispose of – or sell – an asset you own, you have to pay Capital Gains Tax.
For valuable assets, however, this tax burden can be quite large – and sometimes it can even dissuade people from developing that asset to begin with.
That’s why BADR is in force – to encourage people to develop successful businesses, without worrying about the Government applying heavy taxation on the value of any disposals.
If you qualify, you pay CGT at a rate of 10% on the gains you make from selling business assets. This is subject to a lifetime limit of £1m (this was reduced from £10m at the March 2020 Budget).
Will I qualify if I sell my business?
While the pool of eligibility is quite wide, not all people who sell businesses are able to qualify for BADR – so it’s a good idea to check in advance rather than rely on it and get a nasty surprise once the sale has gone through.
If you dispose of either a part or all of a business in which you were a shareholder, sole trader or a partner, you’ll qualify – even if you disposed of the asset after a business closed down.
This only applies if you owned the business in question for over a year before you sold it, and if you’re simply closing it down, you must sell the assets associated with the firm within three years – or your relief eligibility may be at risk.
What about shares, loans and other disposals?
If you possessed shares (as well as voting rights) in a company, then you’re also able to claim BADR on the sale of the firm – providing that either you owned at least 5% of the company or had the chance to buy them at least one year prior to the sale going ahead.
You must have been employed by the firm or held office in the company’s group for at least a year before you can do this, and the firm has to have been one that was focused around trading (as opposed to companies and funds focused purely on activities like investment, which involve little trading).
And if you lent an asset to your business, then you’re also entitled to claim relief on its sale. This only applies if you’ve already sold 5% of the business, or your assets were used for up to a year before the shares were sold.
Over the decades, many entrepreneurship schemes have been set up to encourage business owners to be more enterprising, and there are some specific circumstances relating to these schemes which could also see you eligible for relief.
For example, if you acquired shares after 5th April 2013 in an Enterprise Management Incentive (EMI) scheme, you’ll be able to claim relief.
How do I claim BADR on a business asset disposal?
The process for claiming is surprisingly simple.
Firstly, you need to take the time to work out what your total profit was from the sale of all the assets you think qualify for BADR
Given the potential tax savings available, you may well benefit from seeking the advice of your accountant to work out the numbers for you.
Next, ensure you deduct any qualifying losses from your total, and then also make sure you reduce the total by the current CGT tax-free allowance. For Capital Gains Tax, this is currently £12,300 (£12,000 in 2019/20).
You will then be liable to pay 10% on the remaining profits from the business asset disposal. For most individuals, you can include the disposal and account for any tax owed on your annual tax return.
Click here to the official guides to Business Asset Disposal Relief which provides comprehensive information on how the Relief works in practice, including eligibility criteria.